Microeconomics Graphs and Curve Identification Study Guide

Labor Market Graphs (Ch. 11 & 12)

Understanding Labor Market Graphs

Labor market graphs illustrate the interaction between the supply of and demand for labor, with wage on the vertical axis and labor (hours or workers) on the horizontal axis. These graphs are essential for analyzing how wages are determined and how labor markets function.

• Vertical axis: Wage ($w$)

• Horizontal axis: Labor / Hours of work

• Downward-sloping curve: Labor demand

• Upward-sloping curve: Labor supply

Extra clues:

• If the curve is labeled MRP — that’s labor demand.

• Shifts come from output prices, technology, or input changes.

Common exam questions:

• "What happens to equilibrium wage/quantity when ___ changes?"

• "What about shifts in labor demand or supply?"

• "Where does the firm hire?" — MRP = wage

MRP / MPL Graphs (Labor Demand Components)

Marginal Revenue Product and Marginal Product of Labor

These graphs show how much value each extra worker adds to a firm, which is crucial for understanding labor demand.

• Downward-sloping curve: MRP or MPL × P

• Labeled: MRP (Marginal Revenue Product), MPL × P

Key features:

• Shape shows diminishing marginal product

• Often compared to a horizontal line representing the wage

Most important rule:

$MRP = Wage$

Individual Labor Supply Graph (Ch. 11)

Labor Supply Decisions of Individuals

This graph shows how many hours a single person works at different wage rates, reflecting the trade-off between labor and leisure.

• Vertical axis: Wage

• Horizontal axis: Hours worked

• Curve shape: Up or bends backward

Why it might bend back:

• Substitution effect: Higher wage → work more

• Income effect: Higher wage → work less

At high wages, the income effect can dominate, causing the supply curve to bend backward.

Exam tip: "If wages rise and the worker works fewer hours, which effect dominates?"

Wage Distribution / Percentile Bar Graphs (Ch. 12)

Understanding Wage Percentiles and Inequality

These are bar charts (not curves) that show wage percentiles, differences by education, and inequality results.

• Bars labeled: "10th percentile," "50th percentile," etc.

• Show wage differences for different groups

These graphs do not require calculation, but rather interpretation of wage distribution and inequality.

Inequality Graphs (Ch. 13)

Income Distribution and Inequality

Inequality graphs display how income is distributed across a population, often using bar charts to show shares of income by percentiles.

• Income distribution bar charts

• "Richest 20% get X% of income"

Important: Lorenz curves and Gini coefficients are not required for this course, unless otherwise noted.

Market Power Graphs (Ch. 14)

Monopoly and Market Power

These graphs are crucial for understanding how firms with market power set prices and output. They typically include three main curves:

1. Downward-sloping Demand curve

2. Downward-sloping Marginal Revenue (MR) curve

   • Always below demand

   • Same intercept

   • Twice the slope

3. Marginal Cost (MC) curve

   • Usually upward sloping

How to analyze:

• Find where $MR = MC$ — this gives the profit-maximizing quantity

• Go up to the demand curve — this gives the price

• Do not read price off the MR curve

Additional info: Consumer surplus is the area above price and below demand; deadweight loss is the triangle between $Q_{monopoly}$ and $Q_{efficient}$.

Pricing Strategy Graphs (Ch. 17)

Price Discrimination and Bundling

These graphs illustrate how firms use different pricing strategies, such as charging different prices to different groups or bundling products.

• Multiple prices

• Different customer groups

• Step-like demand curves

• Bundling tables

• Hurdle method illustrations

How to identify:

• If you see two separate demand curves — group pricing

• If you see "hurdle" or "paywalls & quantity choice" — hurdle method

• If you see two goods with different valuations (Poet vs. Quants) — bundling question

Graphs help you see:

• Who pays what price

• Which group is charged more

• Why price discrimination increases profit

• Why consumer surplus shrinks

Curve & Graph Identification Guide (Midterm 3)

Summary Table: Key Graph Types and Features

Graph Type	Axes	Key Features	What to Look For
Labor Market	Wage (vertical), Labor/Hours (horizontal)	Downward-sloping labor demand, upward-sloping labor supply	Shifts: Output price, technology, worker preferences
MRP / MPL	Wage (vertical), Labor (horizontal)	Downward-sloping MRP/MPL curve, horizontal wage	Firm hires where MRP = Wage
Individual Labor Supply	Wage (vertical), Hours worked (horizontal)	Upward-sloping or backward-bending curve	Substitution vs. income effect
Wage Distribution / Percentile	Percentile (horizontal), Wage (vertical)	Bar charts, not curves	Interpret group differences
Inequality	Income group (horizontal), % of income (vertical)	Bar charts, NOT Lorenz/Gini	"Richest 20% get X%"
Market Power	Quantity (horizontal), Price/Cost/Revenue (vertical)	Demand, MR, MC curves	Profit maximization: MR = MC
Pricing Strategy	Varies	Multiple demand curves, bundling tables	Price discrimination, bundling, hurdle method

Additional info:

• Game Theory Matrices (not detailed above): 2x2 boxes showing payoffs, used to identify best responses and Nash equilibria.